Why Australian manufacturing is dying

The following graphs from the Productivity Commission Preliminary Report on Australia’s Automotive
Manufacturing Industry
give an insight into the problems facing Australian manufacturers.

The first graph compares average hourly labor costs for auto-manufacturers in different countries. Australia is second-highest (behind Germany), in terms of labor cost per hour, and roughly 7 times as high as China and India — ignoring local ABS figures for which there are no comparatives.

Hourly Labor Costs

The second graph shows how the rising Australian Dollar has impacted on local auto-manufacturing.

Australian motor vehicle production compared to the trade weighted exchange rate

The local market is not big enough to sustain a competitive auto-manufacturing industry, but that argument does not seem to have hindered five of the top seven global manufacturers — Volkswagen, Hyundai, Toyota, Nissan and Honda — whose local markets are of a similar scale to our own. The difference is that they have adopted a global outlook rather than focusing on their own domestic market as Australia has done.

21 Replies to “Why Australian manufacturing is dying”

  1. “The first graph compares average hourly labor costs for auto-manufacturers in different countries. Australia is second-highest (behind Germany)…”

    Ah, yes, German cars are terribly uncompetitive, aren’t they?

    But if we must focus on labor costs, consider the taxes and other imposts that cause the cost of labor for employers to exceed what the workers can take home and spend: http://is.gd/Putland2013 .

    1. …which is why most German cars are built in factories outside of Germany (e.g. in Brazil and China). The Germans provide the technology and make use of low labor costs in other economies.

      Taxes are unavoidable, but where Australia suffers is with its high cost structure ….. which again may be partially the result of high labor costs. The purchasing power of each dollar spent in Australia is far less than that of most competitors… even Germany. See Australia: Highest Cost of Living. If our cost of living was lower, our labor costs could be more competitive …and vice versa.

      1. and if our government would have taken steps to limit the rise of the A$, but for example linking it to the Chinese currency, our major trading partner, as the Swiss did with their currency to the Euro, we would not be today in this predicament. They meddle in issues that are none of their business like gay marriage, but fail to intervene to save guard our economy.

      2. Having worked in manufacturing all my working life I believe I can shed some light here.

        My belief is that often Australians suffer from a cultural cringe, that somehow things can be done better overseas, and hence a default to importing has developed over the years.
        This is utter rubbish, if we put our minds to it we can be highly competitive, as my recent experience at one multinational where we managed to get our costs down massively and well below NZ and some other countries by a sustained company wide effort to improve productivity.

        But I would suggest that the RBA has stupidly held interest rates too high for too long, and they are still too high. This has fed through to a lack of building and a dormant construction industry for far too long. And now, housing prices will take off more savagely to the upside because of this dearth of supply. This is the last thing we need as housing costs here are too high anyway and reduce the available $ that most Australians have… And of course, that stupidity with the $ has meant so many factories have closed which means a lot of stuff will now have to be imported. And if the $ falls heavily this will cause all sorts of other issues as this feeds straight through to higher prices.

        For the food industry the Coles Woolworths duopoly and a fixation with private label brands has decimated the food industry. Good for Coles and Woolworths, but very bad for local manufacture as their business model results in unsustainably low margins for manufacturers. Ultimately this will also hurt the consumer, as when the $ falls heavily do you think those importers who are supplying an ever greater amt of groceries are going to slash their margins for small volumes here in Australia – be prepared for soaring grocery prices…

        And, finally our government seems to have its priorities all wrong. Carbon tax, gay marriage, mining taxes and all sorts of other distractions have meant that no priority is placed on making this country a more competitive place to do business, which needs to be the first priority. Where are your (and my) kids going to work? I can think of no sizeable examples of countries which have built a strong vibrant nation without a good manufacturing base.

        Some hard times are ahead, but my experience is still that we can actually do pretty well making things here, provided the all of us, the RBA and government actively work to create a sound sustainable competitive economy…

      3. Thank you Chris. I agree with what you say except for lower interest rates. Australia needs to weaken the Dollar, but needs higher rates to prevent further distortion of the property market (aka another bubble). We also need lower property (land) prices to encourage first home-buyers, rather than investors. First home-buyers invest not only in a home but in furnishings, improvements and services that would help kick-start the economy in areas other than construction.

        There are ways to reduce the exchange rate other than with lower interest rates. Principally through the RBA/Treasury printing dollars and purchasing offshore assets (e.g. Australian bank debt held by offshore investors) to be held by the RBA or a sovereign fund. The inflationary effect of a lower exchange rate could be countered by allowing interest rates to rise (slightly).

        Land prices should be lowered by (1) a switch from transfer duties to a land tax, (2) higher interest rates, and (3) placing a ceiling on bank loan-to-value ratios. Land taxes will restrict land-banking by property developers and encourage the release of new land in the market. Removal of transfer duties would improve the transfer rate of properties and encourage baby-boomers to down-size. Higher interest rates would restrict bank credit growth and take some of the heat out of the market — as would lower LVRs.

      4. The destruction of our manufacturing base was deliberately started by the signing of the LIMA agreement by Whitlam in 1975 and endorsed by every government since. Real reform can never happen until the root causes are addressed. If Mum and Pop small businesses received the same “level playing field” that multi national conglomerates claim to wont, there would be far more options for every one to protect themselves from the robbery of inflation. As it stands today the average wage earner only has property to try and keep a little of his/her hard earned money. Property bubbles are the end result of that. Wouldn’t it be nice if our leaders tried to protect the peoples wealth instead of continually trying to pull to rug out from under us..

      5. We have taken the cheese and find ourselves in the high mortgage/high income trap..low interest rates allow the status quo to remain in place…wages cannot go down or people will not be able to afford their inflated mortgage (deathgrip) payments…high wages + government compliance makes business in Australia unrewarding for startups.

  2. Ever since Australia stoped creating it’s own debt and has been borrowing from overseas banksters taxes have become “unavoidable” and ever higher. They create nothing. call it money, demand many times more back in intrest which is not created and therefore there is never enough to be able to pay it all back. That is when there has to be a debt for equity swap, where they take every thing worth having. Some people may get wise to the scam and not borrow, but no problem, just see to it that the labour government racks up a heap more debt and get the next government to create a new tax to pay it off. But karma’s a bitch and I am for one looking forward to seeing that day.

    1. it’s exactly 100 years since the Federal Reserve in the US was handed over to private bankers by a controversial vote in parliament, and most of the world’s countries have since been forced down the same path which has brought us to today’s mess.

  3. Hey, lets all use public transport!!!! Get the cars off the road!! A joke…. I wrote my car off recently not my fault guys… so started using public transport. Driving it would take me 20-25 minutes to get to work. Using public transport 2 hours – I kid you not… Cost, petrol each week in the car – $25-, public transport $60- per week. Trains and bus’ empty when I am on them, can you see why they are empty? Where do I live – Perth. Something is not right here. You wont get people out of their cars unless you fix the cost and time it takes to get to work.

    1. There is another issue here, Treena. For public transport to be cheap, efficient and attractive we would need high density suburban nodes. We will never have an efficient public transport system with our sprawling suburbs. Singapore is a prime example of an efficient city, no traffic jams and super cheap and efficient public transport. No need for a car there. When it comes down to it we would need to change our expectation of our own house on a block of land, and make apartment living more attractive. High body corporate fees and often bad design and low quality make it today an unattractive proposition.

      1. Agreed that low density suburbs are not conducive to mass transport. But that doesn’t mean we should give up our low density lifestyle which has many health and social benefits.

      2. I also prefer the low density lifestyle, Colin, I’m living on small acreage. However there are advantages living in higher density areas if they are cleverly designed, which is the case in Singapore. Especially for the elderly high density living in Singapore offers much more opportunity for social interaction. I would love to see Australia have a mix of both, cleverly designed and coupled with good town planning. This would make our cities more livable, cleaner and greener. Given good, quality alternatives to ‘the house on the quarter acre’ would encourage the baby boomers to downsize, just as the tax changes would that you mentioned (land tax rather than property transfer tax). .

      3. Frank, High density living may be suitable for retirees, but is unsuitable for children IMO. There needs to be a clear distinction between the two groups.

      4. agreed, Colin, with more baby boomers retiring we should cater better to their needs with attractive high density nodes in cities connected by good public transport. That would free up existing housing for the families as baby boomers are down sizing.

  4. Your graph showing the trade weighted exchange rate exchange rate makes your position very clear. Despite increasing sales and exports the Australian car industry cannot make money. So it closes.
    A similar effect is at work in New Zealand, where the loss of the thousands of manufacturing jobs is ignored by government and the economy bumps along supported by the high current commodity prices, and house price inflation.
    Few people seem to worry that this model is unsustainable yet it is hard to see how a crash can be avoided,
    Both Australia and New Zealand suffer from over values currencies. Why? How?
    My reading of economics suggested that this should not happen. Our Reserve Banks appear to believe that it can not happen; Yet both agree that the exchange rates are overvalued. They propose to do nothing different. Theory has been replaced by habit.
    Are we happy that the navigator no longer has a map?

    1. I think both countries lean towards internal welfare rather than external competitiveness, harming their ability to sustain current living standards. Neglect of exchange rates, when other central banks are happily debasing their currencies, has merely aggravated the problem.

  5. Manufacturing around the world has taken a major hit over the past few years. Jobs have been lost and products have been compromised. A huge overhaul is necessary to continue to employ people and create quality products rather than cheap ones in quantity.

    1. There is a great deal of interference in currency markets which is perpetuating the imbalances which caused the problem in the first place. While most other central banks are doing it, the RBA and RBNZ have to intervene to limit damage to their own economies.

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